What are the different types of life insurance policies and which one should I get? The decision to buy is entirely based on the solution, you are looking for. You should definitely buy a term insurance and avoid endowment, money back and whole life policies(my personal suggestion). You can buy ULIPs after scanning the charges in it.
Types of Life Insurance Policies
Term Insurance Policy
An insurance policy where the insured amount is payable only in case of death of the policy holder during the term of the policy is called Term Insurance.
Let us imagine that Mr. X aged 40 years now is taking a 20 year Term insurance policy for 10 Lakhs. What is the benefit payable under this policy?
His nominee will get 10 Lakhs in case of his death anytime in the next 20 years. But if he survives to the age of 60, there will not be any payouts from the policy. So, he will loose the premiums paid under this policy.
Yes, the Term insurance policy is like your car insurance where the claim is payable only in case of accidents or theft. Otherwise you lose the premium paid. But how much is the premium for a Term insurance. LIC is charging 6940 per annum for Mr. X aged 40 for a 20 year term policy. Some private companies are charging lower premium for this. There are online Term policies, where the premiums are almost 2830 for Mr. X.
Whole Life Policy
An insurance policy where the insured amount is payable only in case of death of the policy holder. There is no definite term in these type of policies. In some policies, the upper age is capped.
Endowment policies are the most popular policies in India. In this case you will get policy amount in case of death during the term of the policy or on maturity of the policy.
In the above example of Mr. X going for a 10 Lakhs endowment policy for 20 years, he will get 10 Lakhs along with the bonus at the age of 60. At the current bonus rates of LIC, he will get around 20Lakhs on maturity including bonus. But in case of his death anytime during this 20 year period, his nominee will get the sum insured of 10 Lakhs and the bonus accrued till the death. So, in this policy, there is a sure payment of either death benefit or maturity benefit.
But how much is the premium?
In the case of Mr. X. the annual premium in LIC endowment policy comes to Rs.51, 398. You can see that the premium is very high compared to the Term insurance policy. This is because these are investment linked policies.
How an endowment policy works?
From the 51,398 collected under endowment policy, the insurance company will allot a certain amount for covering the risk cover like in Term insurance policy. The company will also allot a good part in the first year to cover the expenses of the company like agent’s commission, office administration etc. The balance amount is invested as per the guidelines prescribed by the Insurance Regulatory and Development authority (IRDA). These regulations are very strict to ensure safety of amount. Most of the investments will be in government securities and other approved securities which offer low returns but ensures high degree of safety. Because of threes strict investment conditions, your money will be safe, but offer only average returns.
Money Back Policy
If Mr. X wants to get some amount in between, then the insurance company will charge some higher premium and offers this facility. This is called money back policy. In the case of a 20 year money back policy, LIC will charge 67, 694 as annual premium from Mr. X and he will get 20% of the sum insured after 5th, 10th and 15th Year. He will get the balance 40% of the sum insured and the bonus for the 20 years on maturity. In the 10 lakhs policy, he will get 2 lakhs each after 5th year, 10th year and 15th year. These payouts are called survival benefits. At the end of 20 years he will get 4 Lakhs and bonus of around 9.6 Lakhs as per the current LIC rates.
In case of his death anytime during these 20 years, his nominee will get 10 Lakhs along with bonus accrued till date of death. Company will not deduct the survival benefits already paid. This is one reason the premium is high in money back policies.
Unit Linked Insurance Policy (ULIP)
In the case of an endowment policy, the insurance company will invest the amount in traditional instruments like governments. But if the company invest the amount in different instruments like equities and debt as per the options exercised by the policy holders, such policies are called ULIPs. In ULIPs, the investment risks are taken by the customer.
Which is better? ULIPs or Traditional Policies?
There are lots of charges under ULIPs, but these policies can give better returns to the policy holder in the long-term. Go in for such policies, if you can pay for 15 years or more. Otherwise, you will not gain much. Traditional policies offer very low returns, may be in the range of 5-6% on a long-term basis.
But, if you have invested in ULIPs with a short-term view of say 3 years, there is a chance that you may not get back even what you paid!